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The Buy-Sell Dilemma

If you're selling a home, chances are you're also buying one. Which first? It depends on how well you can tolerate 'limbo land.'

February 25, 2001|MARCIE GEFFNER | SPECIAL TO THE TIMES

Wondering how to make the jump from one house to the next without owning two simultaneously--or, perhaps worse yet, owning none at all? You're not alone.

Most moving-up and trading-down homeowners struggle with the dilemma of whether to buy first, then sell, or sell first, then buy.

Some homeowners are affluent enough to avoid the problem by buying a new house and selling the old one at their leisure; others are mobile enough to sell first, move to temporary quarters and buy later. And some lucky folks are able to negotiate buying and selling escrows that close simultaneously.

But real estate agents say most people either make offers to buy first, then pray for quick sales of their existing houses, or put their houses on the market, then scramble to find new houses before escrow closes.

The primary advantage of buying first is the ability to shop carefully for the new house and feel completely secure in that decision before putting the current house on the market.

Buying first "is a harrowing experience, but the odds of finding a house that fits all your criteria are much greater than they are if your home has been sold and you have a tiny window of time in which to find the right house to buy," says Michael Greenwald, a real estate agent and estates division director with Coldwell Banker in Brentwood.

The harrowing part is the possibility that the current house might languish on the market or need to be sold at a below-market price.

One way to mitigate that risk is to make the purchase escrow contingent on the sale of the current house. However, it's a rare seller who will accept such an offer unless the market is weak, the house is a tough sell, the buyer offers an especially attractive price and favorable terms, the buyer's own house is already in escrow, or the seller simply is in no hurry to move.

Some sellers can be enticed by an escape clause that gives the seller the right to continue marketing the house and requires the buyer either to walk away from the transaction or to waive the contingency if the seller receives another acceptable offer.

"The seller will say: I will take your offer, but I am going to leave my house on the market. In the event that I receive another offer that is acceptable, I will give you, for example, 48 hours to remove the contingency," explains Roger Ewing, Greater Los Angeles region general manager for Prudential John Aaroe & Associates, Realtors.

If the buyer removes the contingency, he or she may soon own two houses. Accomplishing this feat requires borrowing against the equity in the current house to obtain the down payment on the financing for the new one, unless the purchase is an all-cash transaction.

This two-houses-are-better-than-none scenario can prove costly because the homeowner must not only make two mortgage payments but also cover the interest on the bridge or equity loan. Renting the for-sale house to a tenant can offset some of the cost, but finding a buyer for a tenant-occupied home presents other difficulties.

Buying first can prove costly in other ways as well.

"By buying first and selling second, you are putting yourself in the position of paying more for the up-leg property and probably selling for less on the down-leg because you are under the gun to sell before someone else bids on the [house you are buying]," Ewing warns.

Maintaining Strength on the Sales Transaction

On the flip side, the primary advantage of selling first is a negotiating position of maximum strength on the sales transaction because there's no pressure to sell quickly. Selling first also eliminates the burden of carrying two mortgages simultaneously.

The downside is the strong likelihood of at least a short-term visit to what Greenwald calls "limbo land," a nebulous realm of temporary living situations that bridge the gap between selling one house and buying the next.

The notion of limbo land includes having to move at least twice, if not several times, between permanent residences.

"Many times, people list their home for sale, then start looking at a home to buy. They don't find anything because the home they are looking for is special, unique or tough to find. Then they decide to rent for a while. That requires a double move, which is not possible for some people," says Neal Weichel, a real estate agent with RE/MAX of Valencia.

The obvious way to avoid the temporary housing scene is to make the sale of the current house contingent on finding a replacement to purchase.

"People actually buy homes [that are sold contingent on the seller's buying another house]. The only problem is that it puts the buyers in limbo land because they don't know whether the person they purchased the home from is ever going to find a house to buy," says Greenwald.

The strategy is most likely to succeed if the market is quite strong, the seller's house is truly a rare find, the price and terms are highly favorable for the buyer or the buyer is in no hurry.

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